Question

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 12%.

	0		1		2		3		4
Project A	-1,200		650		415		290		340
Project B	-1,200		250		350		440		790

What is Project A's payback? Round your answer to four decimal places. Do not round your intermediate calculations.

years

What is Project A's discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.

years

What is Project B's payback? Round your answer to four decimal places. Do not round your intermediate calculations.

years

What is Project B's discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.

years

Answer 1

Payback period	Project A		Project B
Time	Amount	Cumulative	Amount	Cumulative
-	(1,200.00)	(1,200.00)	(1,200.00)	(1,200.00)
1.00	650.00	(550.00)	250.00	(950.00)
2.00	415.00	(135.00)	350.00	(600.00)
3.00	290.00	155.00	440.00	(160.00)
4.00	340.00	495.00	790.00	630.00
Payback period		2 + 135/290		3 + 160/790
Payback period		2.4655 Years		3.2025 Years
Discounted PBP	Project A
Time	Amount	PVf at 12%	PV	Cumulative
-	(1,200.00)	1.0000	(1,200.00)	(1,200.00)
1.00	650.00	0.8929	580.36	(619.64)
2.00	415.00	0.7972	330.84	(288.81)
3.00	290.00	0.7118	206.42	(82.39)
4.00	340.00	0.6355	216.08	133.69
Discounted PBP = 3 + 82.39/216.08
Discounted PBP = 3 + .3813 Years
Discounted PBP = 3.3813 Years
Discounted PBP	Project B
Time	Amount	PVf at 12%	PV	Cumulative
-	(1,200.00)	1.0000	(1,200.00)	(1,200.00)
1.00	250.00	0.8929	223.21	(976.79)
2.00	350.00	0.7972	279.02	(697.77)
3.00	440.00	0.7118	313.18	(384.58)
4.00	790.00	0.6355	502.06	117.47
Discounted PBP = 3 + 384.58/502.06
Discounted PBP = 3 + .766 Years
Discounted PBP = 3.7660 Years